Rizzo: The stock market’s melodrama may not impact real economy

By: Commentary March 13, 2018Comments Off on Rizzo: The stock market’s melodrama may not impact real economy

Most sectors of the economy are strong. Unemployment remains low nationally and on Long Island. Wages are starting to accelerate. The business sector has continued to expand as well, both in the manufacturing and non-manufacturing sectors. Consumers are optimistic and are spending. As measured by sales tax collections, consumer spending was quite strong on Long Island in January. In fact, spending in Suffolk County grew at the second fastest rate year-over-year of all counties in New York.

All of this good news, as well as recent tax cuts, sent the stock market soaring to new heights in January. But this gave rise to fears of inflation and rising interest rates, and the stock market grew increasingly volatile, plummeting by nearly 3,000 points off of its January high.

While this is unnerving, there is little reason to fear these stock market gyrations unless they spill over to the real economy. As long as consumers and business pay attention to the real economy—jobs, production, and spending—the economy should continue to expand. If stock market volatility saps consumer confidence and spending, however, things could quickly turn worse.

There is little reason for this to happen. Most people hold stocks in their 401K plans. For workers who are not near retirement age, they will not be touch-ing those stocks for many years to come, so that current volatility and recent declines in the market should not be a big concern to them. Indeed, it presents a buying opportunity. And those near retirement age should already have investment portfolios that are conservative, with relatively little exposure to stocks. And many people own little or no stocks.

So why the concern? Perhaps because the stock market is seen as a strong indicator of the expected performance of the economy. This is somewhat unfor-tunate, because things are rarely as good or as bad as the stock market would seem to suggest. In this respect, the stock market can be a bit melodramatic.

Another concern is that the Federal Reserve Bank might act too quickly to ward off inflation, leading to higher interest rates and threatening further growth. But the Federal Reserve has favored a measured response, which should be reassuring. And even if the stock market overreacts to this imagined threat, we shouldn’t.